Get Social

Seeking Crypto Clarity: Takeaways From The Congressional Roundtable

Above The Law

Blockchain and cryptocurrency is a hot industry with no shortage of opportunities. But there is one thing the industry still needs: regulatory clarity. Last week, a Congressional roundtable called “Legislating Certainty for Cryptocurrencies” demonstrated a bipartisan commitment to working to provide regulatory clarity for those operating in the digital token economy. The discussion included 50 leaders from the industry including Fidelity, State Street, Union Square Ventures, Andreessen Horowitz, Nasdaq, Ripple, Circle, Kraken, Coinbase, and the U.S. Chamber of Commerce. It was a listening session for the members of Congress to hear from industry leaders in anticipation of requesting formal guidance from the SEC on whether and when a token is a security. However, the discussion was much broader than ICOs.

Michelle Ann Gitlitz, partner at Blank Rome LLP and co-chair of the firm’s Blockchain and Digital Currency Group, was one of 50 industry leaders included in the roundtable. Here are some of her key takeaways and their significance.

There is a need for the law to distinguish between different types of tokens (e.g., securities, commodities, consumer goods, and services) and to focus on the underlying transaction in which the token is used. According to Gitlitz, “Blockchain, coin offerings and Bitcoin have been hot tech topics over the last year and a half. Yet, there is still a lack of understanding of the different types of tokens that exist in the market.” She explains, “One must look at the role of the token in the underlying transaction, its feature and purpose in order to thoughtfully consider appropriate regulation of the token. For example, tokens that function like securities and provide equity interests in companies and potential profit sharing benefits are only one type of token.” As Gitlitz explains, there are also tokens that: (1) act as payment units such as a currency, (2) provide access to a network by connecting users with each other, (3) provide for voting rights, (4) are consumptive in nature (i.e., they are designed to be used or consumed in some way such as providing access to goods, services, or content). She says, “The lack of distinction between different types of tokens hinders the analysis of regulatory issues for this new asset class.”

There is a need to ensure that the U.S. is a hospitable regulatory environment to prevent businesses from going abroad to jurisdictions that provide a single holistic approach to token regulation. Gitlitz explains, “Until a clearly defined regulatory framework is put in place in the U.S., key players in the token economy (e.g., developers, users, investors, and consumers) are incentivized to move overseas to create companies and raise capital in countries that provide regulatory clarity and certainty for these constituents.”

There is a need for clarity on when a network is sufficiently decentralized and a token has full functionality such that the token is not a security. Gitlitz explains, “When the SEC began regulating tokens in mid-2017, it took the position that most tokens are securities. Recent remarks by William Hinman, the director of the division of corporation finance at the U.S. Securities and Exchange Commission, indicate that a token can lose its status as a security if the network becomes sufficiently decentralized, meaning, where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts, and when the token has full functionality.” She adds, “However, we don’t have insight on when a token is ‘sufficiently decentralized’ or what ‘full functionality’ is yet.”

There is a need to identify what types of safe harbors or partial federal preemptions (similar to the U.S. banking system) can be used to assist the token economy in becoming robust while facilitating investor and consumer protection. Gitlitz says, “The lack of comprehensive Federal legislation on blockchain technology and tokens combined with varying degrees of state-specific regulatory regimes makes compliance with law in this area exceedingly complicated. One idea discussed at the roundtable was partial exemption for tokens similar to the system used for national banks.” She explains, “For example, federal law allows the Comptroller of the Currency (OCC) to preempt state law. Despite the federal regulatory role for national banks, states have the power to charter banks that are regulated in part at the state level and subject to all laws of the chartering state and those of other states in which they may do business.”

Correct token regulation will align all stakeholders — developers, investors, and users — in the ecosystem. Gitlitz says, “With clear regulation, all stakeholders will know what their role is in the token ecosystem. This will enable developers, investors, and users to take actions consistent with their role and enhance the growth of the ecosystem.”

The government should not legislate through enforcement; industry should have thoughtful regulatory clarity. The enforcement actions brought by the government thus far don’t teach the industry how to run their token businesses. Gitlitz explains, “Government enforcement actions are generally brought against the worst violators of law — those engaging in fraud, Ponzi schemes, etc. Thus, such actions give little guidance to those who are in good faith trying to comply with the law and regulations that apply to digital assets.”

The goal is to create regulatory trust in digital assets. Gitlitz says, “By legislating in a manner that is thoughtful and takes into account the roles and needs of all constituents in the ecosystem, we can create trust in digital assets.”

Tax laws need to be shaped to provide for de minimis uses of digital currency. Gitlitz explains, “Under the tax laws, cryptocurrency, such as Bitcoin, is treated as property, which places a tremendous accounting burden on taxpayers who want to use cryptocurrency for small everyday purchases such as buying a cup of coffee. If someone uses Bitcoin at Starbucks, the taxpayer must calculate a capital gain or loss on each transaction.”

The Congressional roundtable was an excellent opportunity for blockchain and cryptocurrency leaders to be heard by regulators. These nine takeaways are important action items for those both seeking clarity, and those in positions to provide it. This dynamic, developing industry needs all the support and structure it can get as its leaders continue to disrupt and innovate. With more bipartisan progress like the Congressional roundtable, some true regulatory clarity may be on the horizon.

Olga V. Mack is a blockchain strategist, public speaker, and adjunct professor at Berkeley Law. She is Vice President of Strategy at Quantstamp, the first decentralized security auditing blockchain platform. Most recently, she served as General Counsel at ClearSlideand she has held legal and operational roles at Visa, Zoosk, Pacific Art League, Wilson Sonsini, and Yahoo. Olga founded theWomen Serve on Boardsmovement that advocates for women to serve onthecorporate boards of Fortune 500 companies. You can email Olga atolga@olgamack.comor follow her on Twitter@olgavmack.